Introduction

This chapter is for employees who receive tips.

All tips you receive are income and are subject to federal income tax. You must include in gross income all tips you receive
directly, charged tips paid to you by your employer, and your share of any tips you receive under a tip-splitting or tip-pooling
arrangement.

The value of noncash tips, such as tickets, passes, or other items of value, is also income and subject to tax.

Reporting your tip income correctly is not difficult. You must do three things.

Keep a daily tip record.

Report tips to your employer.

Report all your tips on your income tax return.

This chapter will explain these three things and show you what to do on your tax return if you have not done the first two.
This chapter will also show you how to treat allocated tips.

For information on special tip programs and agreements, see Publication 531.

Useful Items - You may want to see:

Publication

531Reporting Tip Income

1244Employee's Daily Record of Tips and Report to Employer

Form (and Instructions)

4137Social Security and Medicare Tax on Unreported Tip Income

4070Employee's Report of Tips to Employer

Keeping a Daily Tip Record

Why keep a daily tip record.
You must keep a daily tip record so you can:

Report your tips accurately to your employer,

Report your tips accurately on your tax return, and

Prove your tip income if your return is ever questioned.

How to keep a daily tip record.
There are two ways to keep a daily tip record. You can either:

Write information about your tips in a tip diary, or

Keep copies of documents that show your tips, such as restaurant bills and credit or debit card charge slips.

You should keep your daily tip record with your tax or other personal records. You must keep your records for as long as they
are important for administration of the federal tax law. For information on how long to keep records, see How long to keep records in chapter 1.

If you keep a tip diary, you can use Form 4070A, Employee's Daily Record of Tips. To get Form 4070A, ask your employer for
Publication 1244 or go online to www.irs.gov/pub/irs-pdf/p1244.pdf for a copy of Publication 1244. Publication 1244 includes a 1-year supply of Form 4070A. Each day, write in the information
asked for on the form.

In addition to the information asked for on Form 4070A, you also need to keep a record of the date and value of any
noncash tips you get, such as tickets, passes, or other items of value. Although you do not report these tips to your employer,
you must report them on your tax return.

If you do not use Form 4070A, start your records by writing your name, your employer's name, and the name of the business
(if it is different from your employer's name). Then, each workday, write the date and the following information.

The value of any noncash tips you get, such as tickets, passes, or other items of value.

The amount of tips you paid out to other employees through tip pools or tip splitting, or other arrangements, and the names
of the employees to whom you paid the tips.

Electronic tip record.
You can use an electronic system provided by your employer to record your daily tips. If you do, you must receive
and keep a paper copy of this record.

Service charges.Do not write in your tip diary the amount of any service charge that your employer adds to a customer's bill and then pays
to you and treats as wages. This is part of your wages, not a tip. See examples below.

Example 1.

Good Food Restaurant adds an 18% charge to the bill for parties of 6 or more customers. Jane’s bill for food and beverages
for her party of 8 includes an amount on the tip line equal to 18% of the charges for food and beverages, and the total includes
this amount. Because Jane did not have an unrestricted right to determine the amount on the “tip line,” the 18% charge is considered a service charge. Do not include the 18% charge in your tip diary. Service charges that are
paid to you are considered wages, not tips.

Example 2.

Good Food Restaurant also includes sample calculations of tip amounts at the bottom of its bills for food and beverages provided
to customers. David’s bill includes a blank “tip line,” with sample tip calculations of 15%, 18%, and 20% of his charges for food and beverages at the bottom of the bill beneath
the signature line. Because David is free to enter any amount on the “tip line” or leave it blank, any amount he includes is considered a tip. Be sure to include this amount in your tip diary.

Reporting Tips to Your Employer

Why report tips to your employer.
You must report tips to your employer so that:

Your employer can report the correct amount of your earnings to the Social Security Administration or Railroad Retirement
Board (which affects your benefits when you retire or if you become disabled, or your family's benefits if you die) ; and

What tips to report.
Report to your employer only cash, check, and debit and credit card tips you receive.

If your total tips for any 1 month from any one job are less than $20, do not report the tips for that month to that
employer.

If you participate in a tip-splitting or tip-pooling arrangement, report only the tips you receive and retain. Do
not report to your employer any portion of the tips you receive that you pass on to other employees. However, you must report
tips you receive from other employees.

Do not report the value of any noncash tips, such as tickets or passes, to your employer. You do not pay social security,
Medicare, Additional Medicare or railroad retirement taxes on these tips.

How to report.If your employer does not give you any other way to report tips, you can use Form 4070. Fill in the information asked for
on the form, sign and date the form, and give it to your employer. To get a 1-year supply of the form, ask your employer for
Publication 1244 or go online to www.irs.gov/pub/irs-pdf/p1244.pdf for a copy of Publication 1244.

If you do not use Form 4070, give your employer a statement with the following information.

Your name, address, and social security number.

Your employer's name, address, and business name (if it is different from your employer's name).

The month (or the dates of any shorter period) in which you received tips.

The total tips required to be reported for that period.

You must sign and date the statement. Be sure to keep a copy with your tax or other personal records.

Your employer may require you to report your tips more than once a month. However, the statement cannot cover a period
of more than 1 calendar month.

When to report.
Give your report for each month to your employer by the 10th of the next month. If the 10th falls on a Saturday, Sunday,
or legal holiday, give your employer the report by the next day that is not a Saturday, Sunday, or legal holiday.

Example.

You must report your tips received in September 2015 by October 13, 2015.

Final report.
If your employment ends during the month, you can report your tips when your employment ends.

You can avoid this penalty if you can show reasonable cause for not reporting the tips to your employer. To do so,
attach a statement to your return explaining why you did not report them.

Giving your employer money for taxes.
Your regular pay may not be enough for your employer to withhold all the taxes you owe on your regular pay plus your
reported tips. If this happens, you can give your employer money until the close of the calendar year to pay the rest of the
taxes.

If you do not give your employer enough money, your employer will apply your regular pay and any money you give in
the following order.

Any taxes that remain unpaid can be collected by your employer from your next paycheck. If withholding taxes remain uncollected
at the end of the year, you may be subject to a penalty for underpayment of estimated taxes. See Publication 505, Tax Withholding
and Estimated Tax, for more information.

Reporting Tips on Your Tax Return

How to report tips.Report your tips with your wages on Form 1040, line 7; Form 1040A, line 7; or Form 1040EZ, line 1.

What tips to report.
You must report all tips you received in 2014 on your tax return, including both cash tips and noncash tips. Any tips
you reported to your employer for 2014 are included in the wages shown on your Form W-2, box 1. Add to the amount in box 1
only the tips you did not report to your employer.

If you did not keep a daily tip record as required and an amount is shown on your Form W-2, box 8, see Allocated Tips, later.

If you kept a daily tip record and reported tips to your employer as required under the rules explained earlier, add
the following tips to the amount on your Form W-2, box 1.

Cash and charge tips you received that totaled less than $20 for any month.

The value of noncash tips, such as tickets, passes, or other items of value.

Example.

Ben Smith began working at the Blue Ocean Restaurant (his only employer in 2014) on June 30 and received $10,000 in wages
during the year. Ben kept a daily tip record showing that his tips for June were $18 and his tips for the rest of the year
totaled $7,000. He was not required to report his June tips to his employer, but he reported all of the rest of his tips to
his employer as required.

Ben's Form W-2 from Blue Ocean Restaurant shows $17,000 ($10,000 wages plus $7,000 reported tips) in box 1. He adds the $18
unreported tips to that amount and reports $17,018 as wages on his tax return.

Reporting social security, Medicare, Additional Medicare, or railroad retirement taxes on tips not reported to your employer.If you received $20 or more in cash and charge tips in a month from any one job and did not report all of those tips to your
employer, you must report the social security, Medicare, and Additional Medicare taxes on the unreported tips as additional
tax on your return. To report these taxes, you must file Form 1040, Form 1040NR, 1040-PR, or 1040-SS (not Form 1040EZ or
Form 1040A) even if you would not otherwise have to file.

Use Form 4137 to figure social security and Medicare taxes and/or Form 8959 to figure Additional Medicare Tax. Enter the taxes
on your return as instructed, and attach the completed Form 4137 and/or Form 8959 to your return.

If you are subject to the Railroad Retirement Tax Act, you cannot use Form 4137 to pay railroad retirement tax on unreported
tips. To get railroad retirement credit, you must report tips to your employer.

Reporting uncollected social security, Medicare, or railroad retirement taxes on tips reported to your employer.
You may have uncollected taxes if your regular pay was not enough for your employer to withhold all the taxes you
owe and you did not give your employer enough money to pay the rest of the taxes. For more information, see Giving your employer money for taxes, under Reporting Tips to Your Employer, earlier.

If your employer could not collect all the social security and Medicare taxes or railroad retirement tax you owe on
tips reported for 2014, the uncollected taxes will be shown on your Form W-2, box 12 (codes A and B). You must report these
amounts as additional tax on your return. Unlike the uncollected portion of the regular (1.45%) Medicare tax, the uncollected
Additional Medicare Tax is not reported on your Form W-2.

To report these uncollected taxes, you must file Form 1040NR, 1040-PR, or 1040-SS (not Form 1040EZ or Form 1040A) even if
you would not otherwise have to file. You must report these taxes on Form 1040, line 62, or the corresponding line of Form
1040NR, 1040-PR, or 1040-SS (not Form 1040EZ or Form 1040A). See the instructions for these forms for exact reporting information.

Allocated Tips

If your employer allocated tips to you, they are shown separately on your Form W-2, box 8. They are not included in box 1
with your wages and reported tips. If box 8 is blank, this discussion does not apply to you.

What are allocated tips.
These are tips that your employer assigned to you in addition to the tips you reported to your employer for the year.
Your employer will have done this only if:

You worked in an establishment (restaurant, cocktail lounge, or similar business) that must allocate tips to employees, and

The tips you reported to your employer were less than your share of 8% of food and drink sales.

No income, social security, Medicare, Additional Medicare, or railroad retirement taxes are withheld on allocated tips.

How were your allocated tips figured.
The tips allocated to you are your share of an amount figured by subtracting the reported tips of all employees from
8% (or an approved lower rate) of food and drink sales (other than carryout sales and sales with a service charge of 10% or
more). Your share of that amount was figured using either a method provided by an employer-employee agreement or a method
provided by IRS regulations based on employees' sales or hours worked. For information about the exact allocation method used,
ask your employer.

Must you report your allocated tips on your tax return.
You must report all tips you received in 2014 on your tax return, including both cash tips and noncash tips. Any tips
you reported to your employer for 2014 are included in the wages shown on your Form W-2, box 1. Add to the amount in box 1
only the tips you did not report to your employer. This should include any allocated tips shown on your Form(s) W-2, box 8,
unless you have adequate records to show that you received less tips in the year than the allocated figures.

How to report allocated tips.
Report the amounts shown on your Form(s) W-2 , box 1 (wages and tips) and box 8 (allocated tips), as wages on Form
1040, line 7; Form 1040NR, line 8; or Form 1040NR-EZ, line 3. You cannot file Form 1040A or Form 1040EZ when you have allocated
tips.